Moominmama's Taxes 2016-17 Edition

I've filed Moominmama's tax return for this tax year. The tax year runs from 1st July to 30th June in Australia. The figures ignore employer and employee contributions to superannuation (retirement account) which amount to a lot of extra income. Everything is in Australian Dollars of course.

Her salary is down because she went on maternity leave and the average tax rate also falls as a result. Investment income is up though.

Here are the reports on Snork Maiden's taxes for all previous years:

2015-16
2014-15
2013-14
2012-13
2012-13
2011-12
2010-11
2009-10
2008-9
2007-8

Moominpapa's Taxes 2016-17 Edition

I have now completed my tax return. Looks like I should get a $2,870 refund. This huge increase in refund compared to last year is mainly due to the 16% increase in tax witholding by my employer relative to only an 11% increase in tax owed. My taxable income is up by 8%. But my tax is up 11%. This is because the increase in income is taxed at the maximum marginal rate, which is 49%. Gross cash income is before tax income ignoring franking and other tax credits and adding in net undiscounted capital gains (not deleting losses from previous years). It was up 16%.

I again checked what information the government knows about my tax affairs as revealed by the prefilled information on my tax return. They are still missing as much information as last year.  I filed Moominmama's return online for the second time, using the prefilled numbers plus deductions.

Previous years' reports:

2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-9
2007-8

Interactive Brokers Australia

Interactive Brokers have set up a subsidiary in Australia and are requiring all clients resident in Australia to move their account to the new broker. The only declared difference is that they won't hold cash in currencies apart from AUD and USD. A few years ago they told Australian clients that they couldn't borrow on margin any more. Maybe that was fixed in the meantime. In any case, the website indicates that you can borrow on margin. Formally, it doesn't change the obligation to pay US estate tax on US assets. These start at an estate of only USD60k for non-US citizens. But it would probably make it easier to avoid. I still have a US retirement account, which is a bit over the USD 60k limit and a US mutual fund worth USD 14k. I also have a bank account, but that isn't included in the estate tax liable assets. It seems though that the US-Australia estate tax treaty means that my estate wouldn't be required to pay US estate taxes.*

* This wasn't the case for my mother who lives in a country that doesn't have an estate tax treaty with the US.

Property Taxes

Our "rates" or property taxes are up 30% from last year! Presumably this is partly because of the shift in this state from stamp duty on buying a house (we paid $A 27,000 when we bought this house) to land taxes over time. Only the value of the land is taxed here in Australia, not the structure on it. For "townhouses" like ours - our house is actually a separate house - that are part of a body corporate (condo association) the land is valued as a share of the overall value of the land in the development. Our land share is only valued at $A168k, when a similar individual block in this suburb would be about $400k. So, this means our property tax is much lower than if we didn't live in a development like this. It's still $1,970 per year.

I just noticed that taxes on commercial property are outrageously high. The value in excess of $A600k is taxed at almost 5%. So you would pay about $A40k a year on land valued at $1 million.

Moominpapa's Taxes 2015-16 Edition

I have now completed my tax return. Looks like I should get a $204 refund. My taxable income is up by 2%. But my tax is up 4% despite a 23% increase in deductions and increases in tax credits. I'm a bit puzzled by that but I did move into the top tax bracket. Gross cash income is before tax income ignoring franking and other tax credits and adding in net undiscounted capital gains (not deleting losses from previous years).

This was the first year I checked what information the government knows about my tax affairs as revealed by the prefilled information on my tax return. They are missing a lot of information on my Australian accounts and none on my foreign holdings. Strangely they have dividends for some shares I have with a broker and don't have information on dividends from other companies that I hold through the same broker. Also they have one managed fund account but not the other I hold with the same firm. If I filed a return based on the numbers they know but taking the deductions I could document my return would look so radically different to last year that I think it would raise a lot red flags. But I didn't want to give the government any more information than they have, so I again filed a paper return. I filed Moominmama's return online for the first time, using the prefilled numbers plus deductions.

Previous years' reports:

2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-9
2007-8

P.S. 9 November

I got a more than $900 refund. Don't know what I got wrong in my calculations, but I'm not complaining :)

Investment Tax Credits

Revanche provides info on her progress in increasing dividend flow from stocks. I can't actually give you that exact information unless I ignored the dividend component of pay outs from managed (mutual) funds, because I haven't kept an exact record of that breakdown, as it isn't needed for tax purposes and doesn't help much for investment management purposes. What I do track is the tax credits associated with dividends. This is a particularly Australian phenomenon. Companies can pass on credit to shareholders for the Australian company tax they paid. These are called "imputation credits" or "franking credits". We can also claim a tax credit for foreign tax withheld on dividends etc. I call the total "investment tax credits". And this is what it has done since the 1997-98 tax year:

There was a big fall off during the Global Financial Crisis, but since then we have seen a steep rise. This year we reached just under AUD 9,000. These credits reduce our tax bill dollar for dollar. We are going to need to multiply this by nine though to wipe out our current tax bill :) It's at about AUD 79k before credits. The yield of tax credits is 1% of the liquid non-retirement assets we have. So, they'd have to reach AUD 8 million to eliminate our current tax bill. That's not going to happen, unfortunately.

Australian Federal Budget 2016

The budget released yesterday actually turned out pretty well for me despite some of the leaked stories. In the end the income level at which the 30% superannuation contributions tax start was lowered from $300,000 to $250,000 rather than $180,000 and the cap on concessional (pre-tax) contributions for people over 50 will stay at $35,000 per year. The cap for under 50s is reduced from $30k to $25k. The biggest changes are a lifetime cap on non-concessional (post-tax) contributions of $500k rather than $180k per year. I might just contribute $500k just before retiring, but it's not going to change my plans. Also there is a $1.6 million cap on how much you can transfer into a tax free account after you retire from an accumulation fund. This number seems to be designed to be equal to roughly the maximum contributions allowed under the new rules over a lifetime. Effectively earnings in retirement on earnings in the accumulation phase above the rate of inflation would be taxed....  Currently, I have $385k in Australian super. If I work to age 65 and continue my current rate of contribution I would add $450k in concessional contributions. So, I could certainly add the $500k just before retiring, as long as investment returns are not too spectacular in the interim.

Other news in the budget is that the 37% tax bracket threshold will be raised to $87k p.a. instead of $80k. That would reduced my tax by $315. So, all in all, it was an OK budget.

P.S.

Now I just read that the concessional cap has been lowered to $25k for everyone, regardless of age. So, what I read yesterday was wrong. But this is from 1 July 2017. So, in the next tax year I can keep my current contributions rate and then after that I will have to cut them and I will have a $3,000 tax hike. Of course, if Labor come to power at the election on 2 July this year that might not happen...

There are a lot of changes, which mostly make super more complicated.

Entering the Top Tax Bracket

Only 3% of Australian taxpayers are in the top tax bracket, which starts at $180,000 a year and has a marginal tax rate currently of 49%. And now I'm one of them, I think. IPE just declared a 5.75 cents a share dividend payable next month. I have 100,000 shares and so the dividend is $5,750. And it is a totally unfranked dividend. After this, I'm currently estimating my taxable income for the year at $182k and I'm now expecting to pay $3,000 extra tax at tax time. That also means I'm going to have to pay quarterly tax from now on.

I guess this is a good problem to have, but it feels kind of absurd that I'm now in the top tax bracket. Of course, when I first moved to Australia I wasn't that far from it because it kicked in at $50,000 a year in those days (1996) and my salary was a little higher than that. After "voluntary" super contributions of 7% and some deductions I was out of the zone.

Moominmama's reaction was that I should generate some business expenses to pull my income down. I could buy a nice big computer screen for home use, which I couldn't charge to my employer. It will be half price now I'm in the top tax bracket. I'm already almost maxing out my pre-tax super contributions. But spending money on stuff just to reduce tax is silly.

Superannuation Reform Again?

Changes to superannuation are a perennial topic. If the government does this - lower the threshold for the 30% super contributions tax to $180k income per year and cut the concessional cap to $20k p.a. - I figure I will have to pay almost $7,000 a year more in tax. My taxable income this year looks like being just below $180k but the threshold for the super surcharge adds things like employer super contributions and investment losses to the taxable income amount. It would make most sense to cut the non-concessional cap, which is currently $180k per year, dramatically, as that is the way that wealthy people can get really large amounts of money into the super system, which will be taxed at a zero rate once they retire. But, of course, there is no immediate revenue to be gained by cutting the non-concessional cap. To simplify the system the government could just get rid of the concessional/non-concessional distinction, stop taxing earnings and then have a simple US Roth style system. Much too logical, of course. Actually, the optimal solution, assuming that super will be taxed in some way is to go for the US 401(k)/403(b) approach where there is no tax on contributions or earnings and regular tax on payouts. This gives the the money the best opportunity to increase in value... well under some economic assumptions anyway.

Pre-Tax (Concessionary) Superannuation Contributions

After thinking about making after-tax retirement contributions, I thought today - Heh, I'm not even making the maximum pre-tax contributions. I've been making about $A28k a year in pre-tax contributions. Actually, that is supposedly my employer's contribution. In the university sector in Australia, employers contribute 17% on top of the nominal salary to superannuation for continuing (=permanent) employees, as opposed to the minimum government requirement of 9.5%. The maximum pre-tax contributions allowed for over 50's currently is $A35k per year ($A30k for under 50s). So, I just submitted the form to add $100 a week to my contributions. I didn't totally max things out to allow for a year or two of growth in salary before having to submit another form.

By the way, the standard agreement in the higher education sector includes another 8.5% pre-tax contribution from the employee's salary. I already opted out of that, because it would have been over the concessionary limit already when I started in 2011, when the concession limit was $A25k a year. Actually, I already had to withdraw an excess contribution to superannuation last year, which was a hassle, before the contribution limit was raised.

I'm still thinking about post-tax contributions. If I do it, I think I will start small at say $A1000 per month. That is small compared to the limit of $A15k per month :)

How Much Could We Save by Renting Our House out for a Year?

Bigchrisb commented on my recent post that we could save money by renting our new house out rather than going to live in it immediately. This is because the stamp duty paid to buy new properties is in this territory immediately tax deductible for investors. In Australia no costs of owner occupiers are tax deductible. So, I've calculated roughly what I think the financial gain from renting our house out for a year would be and come up with $18k:

The main deductions are the stamp duty, mortgage interest and depreciation. The first two we are going to pay ourselves anyway and so aren't actually additional costs while the latter is probably not a real cost, or we are going to suffer it anyway. Next there are property management fees, which might help in getting a tenant fast etc. and the difference between land tax on investors and rates on owner occupiers. There are real extra costs.

Assuming we could rent the house for one year at $650 a week we would earn $33800 in rent. So, the net income is -$34k and the tax saved at 40% is $13.5k. On the other hand we make $33.8k we would otherwise not have, but pay $25.8k in rent on our existing apartment that we would not have to pay if we lived in the new house as well as $3.7k in extra actual costs. So the net financial gain is $17.8k.

Let me know if you think I got something major wrong.

So, if we don't do this, economists would say that our revealed preference shows that the utility of living in our new house a year earlier and avoiding dealing with the hassles of being a landlord are worth at least $17.8k to us. For me, $17.8k is about 1.2% of net worth and so it's not enough to make a difference. It's not a lot more than our after tax salaries for one month. I asked Snork Maiden how big the number would have to be before she would be willing to do it and she said $50k. I know that if it was $100k I probably would do it :)

ASX at Post-GFC High

Broke out of the trading range of the last year and a half. I had been thinking to rebalance away from large cap Australian stocks at the beginning of the week as US indices were looking like they could be topping out. But various evidence including the behaviour of the DAX index in Germany - which had recently broken out - made me eventually not do it.

Super Funds Make 7.5% in 2014

Says this article in the Australian. We made 12.5% on our retirement accounts this year in Australian Dollar terms. Overall return on all assets was 9.2% against a 4.01% gain in the ASX 200. Diversification away from Australian shares helped this year. OTOH the MSCI gained 4.71% in USD terms, while we lost 0.11% in USD terms overall.

Murray Report on the Australian Financial System and Superannuation

The findings of the Murray review of the Australian financial system have been released. I am most interested in their recommendations for superannuation (retirement accounts). Of course, there is no way to know yet what recommendations the government (or future governments) will take on board. This just adds to the uncertainty surrounding super. I had been thinking that now I am 50 years old, as soon as we buy a house I would start making after tax ("nonconcessionary") contributions to super. This is because once you retire there is no tax on superannuation earnings and it is only 10 years till I am 60 and could withdraw money. Though pre-tax contributions ("concessionary" - actually they are taxed at 15% instead of your marginal rate) are limited to $35k per year, you can contribute up to $150k per year after tax. But if they actually withdraw the advantageous tax status of super and worse still if they end up forcing people to take an annuity instead of being able to access their money as they like then I wouldn't want to put any extra money in super at all. The review recommends making annuities a default option, which people will have to opt out of, but I can imagine it becoming compulsory. So, for now, even when we have bought a house I wouldn't plan on adding any extra non-concessionary contributions to super. And yes I sold Qantas too soon :(

Moominvalley October 2014 Report

The Australian Dollar rose slightly this month from 87.35 to 87.89 US cents. The MSCI World Index rose 0.3%, the S&P 500 rose 2.44%, and the ASX200 rose 4.43%. In Australian Dollar terms we gained 2.02% and in US Dollar terms 2.65%. So we slightly underperformed the Australian market and gained against the global markets. Most asset classes gained with hedge funds, private equity, and Australian small cap stocks falling.

As a result, net worth rose $A26k to $1.281 million (new high) or $US30k to $US1.126 million. The monthly accounts (in AUD) follow:

Current non-investment income (salary etc.) was above normal at $20.5k. This was due to tax refunds and a very large Medicare benefit.* Retirement contributions were $3.2k as normal. Spending was $19.4k which I think is a record. We spent $12.7k on health care - for an IVF cycle. It turns out it didn't work, so maybe we will be spending this again in a couple of months.

Still we managed to save $717 from current non-investment income. We gained $25k on investments.

* Australia has a hybrid public health care, private insurance, and user pays health system. At least for out-patient services we typically get the government contribution as a cash payment to our bank account.

Supplementary Section Instructions Only Available as html?!

Apparently you can't even download a pdf of the supplementary tax return instructions. Instead you have to go through all these webpages.... There is a pdf of the main instructions (and hard copies at ATO offices) but not of the supplementary instructions. Why? If someone knows where they are please let me know!

Second Investment in Managed Futures

I have long seen the advantages of managed futures funds. The best of managed futures funds companies seems to be Winton. I previously made an investment with Man-AHL. The fund hasn't made much money for us, but did much better in the financial crisis than most of my other investments. We have 0.80% of net worth invested in the fund. We also have some investment in commodities via GTAA. Another fund that hasn't done much of anything so far. Now I have made an initial investment in a Winton fund offering. The investment is 4.6% of net worth. This takes exposure to commodities out of net worth to 6.0% and out of gross assets 4.5%. The main downside to this fund is that in Australia it doesn't have any tax advantages compared to stocks, which have strong advantages. This means that this will likely remain a small diversifying investment until maybe one day I set up a self-managed super fund, which is a tax advantaged structure itself.

How does this fit into our overall investment strategy? Basically we have a 60/40 portfolio with 60% in stocks and 40% in other investments. Within the stocks 2/3 are planned to be Australian stocks and 1/3 foreign. Within those categories we also allocate to large and small cap Australian and to US and non-US stocks in proportion to their market capitalizations. In the 40% other we have allocations to: bonds, real estate, hedge funds, commodities, private equity, cash, and other. The whole portfolio is then levered to provide about a beta of 1 to the stock market and rebalanced on an ongoing basis. The leverage of a diversified portfolio is an idea from the risk parity approach. 60/40 is simply the traditional stock-bond ratio used for diversified portfolios, and we weight heavily to Australian stocks for tax reasons. Several of the supposedly non-stock investments are in fact Australian listed stocks that are listed investment companies pursuing alternative investment strategies. A lot of the leverage is obtained by investing in leveraged (geared) managed stock funds rather than using margin loans ourselves. We keep the actual margin loan quite small most of the time. This is because the interest rate we can get is much worse than what the funds can get. Interactive Brokers has much better interest rates, but they aren't giving loans to Australian investors at the moment. All this seems to me a reasonable strategy for a non-high net worth investor based in Australia.

10 Year Rates of Return: ASX200 vs MSCI, SPX, and Moom

Another way of showing just how extraordinary the performance of the Australian stockmarket has been in the last couple of decades. I've posted this graph before, but now I've added the rate of return of the ASX200 index, which is the 200 largest stocks by capitalization on the Australian share market:

Returns are the average annual rate of return over the 10 years previous to the date marked. The ASX almost hit 15% per annum over ten years at one point! This maybe isn't a fair comparison as Moom, MSCI, and S&P500 are returns in US Dollars and the ASX200 is the return in Australian Dollars. ">Again you can see that I track the MSCI pretty closely.

Sources of Data on Stock Market Accumulation Indices

It's easy to get real time information on a wide range of stock market indices and historical data on a daily basis from sites like Yahoo Finance. But getting data on accumulation indices is much harder. Accumulation indices or in US terminology "total return indexes" include dividends in the index return. So they track how much your money would be worth if you could invest in the index and then reinvest all dividends without paying taxes or management fees. I have collected data on the MSCI All Country World Index and S&P500 total return index going back to 1996. My current sources for these indices are here and here.

The MSCI site allows you to select different pages of index returns using menus. I use the ACWI for the Developed and Developing Country, Gross returns, and Standard (midcap and large cap) options. Gross returns also include tax credits. I would include small caps, but that data wasn't available when I started following the series. You can select the data for any date you like.

At the S&P website you need to get the daily fact sheet on each index which includes price only and total return indices. The only way to get exact end of calendar month data is to collect it on the last day of each month. It seems that you now need to subscribe to get historical data. They used to provide a few months for free. You can get Australian indices here as well as the US ones I usually collect from here.

Bigchrisb recently linked to another source for the Australian ASX200 accumulation index - statistics provided by the Reserve Bank of Australia. You can get monthly data for a few recent years there.

More International Investing Red Tape

It used to be that one advantage of being an Australia based investor was that you could invest in any investment product anywhere in the world and as long as you paid your taxes the government didn't mind. Of course, the taxes are relatively high compared to living in Hong Kong or Singapore but low compared to Western Europe. By contrast, US investors are heavily restricted unless they have a high net worth and become "accredited investors". But it seems the red tape is increasing (not surprising under a Labor government). I have had an account with Interactive Brokers since I lived in the US. This includes margin lending and I currently am borrowing money from them. Their interest rates are much lower than those you can get with retail brokers here in Australia. But, I just got a message from them that Australia modified the Corporations Act in 2010 so that margin lenders to Australian clients all need some licence. IB was told at the time that they didn't need to get the licence modification but now they do. Therefore, until they get the licence approved I won't be able to make any new investments on margin. Of course, I can close positions and I could add enough money to the account to pay off the loan and then continue to make new investments. No problem with trading futures as IB isn't lending money on futures trades. I haven't done any futures trades for several years. They gave us the option of closing our account at this point. Of course, I affirmed to keep my account open.